Is a Private Equity Firm Required to Register?

This is the third of three posts that summarize the circumstances under which a venture capital or private equity management company (a PE Firm) may be required to register under Alberta securities law. The focus of this particular post is the investment fund manager registration requirement.

Insights in Brief

The Alberta Securities Commission refers to a PE Firm as an entity that becomes actively involved in the management of the companies in which it invests.

An investment fund manager is an individual or an entity that has the power to direct, and exercises the responsibility of directing, the affairs of an investment fund.

If a PE Firm is actively involved in the management of the companies in which it invests, then its investment portfolio is generally not considered to be an investment fund and, as a result, the PE Firm is not required to register as an investment fund manager.

What is a PE Firm?

The Alberta Securities Commission’s guidance on venture capital and private equity investing (the PE Guidance) characterizes a PE Firm as an entity thatinvests for the purpose of being actively involved in the management of its portfolio companies. See here for more details.

The PE Guidance indicates that the typical PE Firm engages in activities that may require it to register as an investment fund manager under Alberta securities law.

What is an investment fund manager?

Alberta securities law defines an investment fund as either:

(a) a mutual fund, which is an issuer whose primary purpose is to invest money provided by its security holders and whose securities are redeemable on demand, or within a specified period after demand, at an amount computed by reference to the value of an investor’s proportionate interest in the issuer’s net assets; or

(b) a non-redeemable fund, which is an issuer whose primary purpose is to invest money provided by its security holders and that (i) does not invest for the purpose of exercising or seeking to exercise control, or for the purpose of being actively involved in the management, of the companies in which it invests, and (ii) is not a mutual fund.

An investment fund manager is an entity that has the power to direct, and exercises the responsibility of directing the affairs of, an investment fund. This includes management of an investment fund’s day-to-day operations.

What is the investment fund manager registration requirement?

The investment fund manager registration requirement is the requirement in Alberta securities law that prohibits a PE Firm from acting as an investment fund manager in Alberta unless the PE Firm is registered as an investment fund manager with the Alberta Securities Commission.

Except for the ultimate designated person (i.e., the chief executive officer) and the chief compliance officer, an individual who acts on behalf of a registered investment fund manager in Alberta is not required to register under Alberta securities law.

In order to be registered, and to maintain its registration, as an investment fund manager, a PE Firm must satisfy certain capital and insurance requirements, and the individuals whose registration the PE Firm sponsors must satisfy certain proficiency requirements.

Is a PE Firm required to register as an investment fund manager?

The PE Guidance states that, if a PE Firm is actively involved in the management of the companies in which it invests, then its investment portfolio is generally not considered to be an investment fund and, as a result, the PE Firm is not required to register as an investment fund manager.

Active management includes, but is not limited to, representation on a company’s board of directors, direct involvement in the appointment of a company’s managers, and input in a company’s material management decisions.

Are there exemptions from the investment fund manager registration requirement?

There are a small number of exemptions from the investment fund manager registration requirement, the availability of which depends on the nature of the PE Firm’s activities. A PE Firm may apply to the Alberta Securities Commission for discretionary relief if it is unable to comply with a specific provision of an investment fund manager registration exemption.

Invitation for discussion

If you would like to discuss this blog in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.

Disclaimer

The foregoing is for general discussion purposes only and should not be construed as legal advice to any one firm. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.